The eNTRePReNeUR’S ROADMAP - Woodruff Sawyer...typically buy only $1 million to $3 million in...

The eNTRePReNeUR’S ROADMAP

FROM CONCePT TO IPO

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You’ve just started your business . . . or you’ve grown it to a point where you have

something worth protecting. In any case, sooner than later, the issue of “what makes

sense to insure” will come up. This chapter is intended to help you answer this question.

GROWTh STAGe: RISK MANAGeMeNT FOR PRIVATe COMPANIeSOnce a growing private company determines that it wants to recruit and retain

excellent directors, it’s time to think about acquiring directors and officers (D&O)

liability insurance. D&O insurance covers directors and officers of companies when

they are sued in this capacity. Placing this insurance sooner than later gives directors

and officers the comfort of knowing that there is more than just the company’s

balance sheet standing behind them should they be sued.

Some of the reasons private companies purchase D&O insurance include:

• Attracting new directors

• Venture capital requirements

• Emerging risks

• Regulatory exposures

• Bankruptcy

• Mergers and acquisitions

• Shareholder lawsuits

• IPO considerations

Let’s take a closer look at the details of private company D&O insurance, including

how it works and what to watch for.

THE INS AND OUTS OF D&O INSURANCEIt’s helpful to understand how D&O insurance is structured and responds. There

are typically three insuring agreements in a private company D&O insurance policy:

Side A, Side B, and Side C (Figure 1).

INSURING YOUR BUSINeSSWoodruff-Sawyer & Co.

Priya Cherian Huskins, Partner and Senior Vice President

Wade Pederson, Partner and Senior Vice President

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PART I: THE SEED STAGE: STARTING A COMPANY WOODRuff-SAWYER & CO.

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only after a final judgment, insurance can cover

defense costs until then.

Insured versus insured: Private company D&O

insurance carriers will not cover claims in which

directors and officers (former or current) of

the same company sue each other. However,

companies can negotiate limited exceptions to the

exclusions (also known as “carve-backs” that give

back coverage), for example, limiting the number

of years a director must be separated from the

company before the exclusion no longer applies.

Duty to Defend vs. Duty to IndemnifyDefense costs are a big part of what’s covered

in a D&O insurance policy and are always part

of the total limit that will be paid for this type

of insurance. Private companies can purchase

either a duty to defend or a duty to indemnify

policy.

Side A responds when a company is unable

to indemnify its directors and officers. Side B

reimburses a company for its indemnification

obligations to its directors and officers. Side C

provides corporate coverage whenever the

company is sued alongside directors and officers.

Private companies can purchase D&O insurance

as a stand-alone product or combined with other

policies for cost savings. See Figure 2.

Negotiating exclusionsA policy exclusion removes a particular claim

from the policy’s coverage. The scope of these

exclusions can sometimes be negotiated. Some

areas of negotiation include:

Intentional fraud: Insurance carriers will not

insure intentional fraud, but companies can

negotiate the point at which the conduct is

excluded. If the fraud exclusion can be triggered

A B C

PersonalProtection Balance Sheet Protection

• Traditional ABC policy strikes a balance between personal asset protection and corporate balance sheet protection

• Vast majority of companies incorporate primary ABC coverage as a means of risk transfer

TRIGGERActions of entity for securities,EPL & limited other claims

PAYSOn behalf of entity

RETENTIONApplies

RETENTIONApplies

RETENTIONNone

PAYSOn behalf of entity(Fundsindemnification of D&Os)

PAYSOn behalf of D&Os

TRIGGERActions of D&Os that aren’t indemnifiable

TRIGGERActions of D&Os that are indemnifiable

FIGURe 1 Traditional ABC Policy for Private Companies

©Woodruff-Sawyer & Co. 2017 (used with permission)

Woodruff-SaWyer & Co. INSurING your BuSINeSS

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Younger and smaller private companies will

typically buy only $1 million to $3 million in limits.

As private companies mature, they start to look

at $5 million to $10 million in limits. Amounts

may be higher for companies in highly regulated

industries.

The next question is usually: How much will the

insurance cost? The answer depends on many

factors, including the overall state of the D&O

insurance market.

In purchasing D&O insurance, pricing should

not be the end of the analysis. D&O insurance

is highly customized—in other words, policy

contracts are not standardized. The same

carrier has the discretion to offer many different

versions of policy terms to different companies.

At the end of the day, money spent on an

insurance program with broad coverage terms

offered by a quality insurance carrier will

provide a better value for a company than a

less-expensive program with poor contractual

terms offered by a carrier that has no intention of

paying future claims.

‘Duty to indemnify’ means a company selects its

own counsel. However, the carrier will only pay

“reasonable” defense fees. The difference between

what a company thinks is reasonable and what an

insurer thinks is reasonable can be significant.

‘Duty to defend’ means the insurer chooses the

defense counsel, who may or may not be the

company’s first choice. However, the upside

to a duty to defend policy is that the insurer

is typically responsible for paying the defense

fees for all allegations brought in the litigation

and not just the allegations that are covered

under the policy.

Choosing Policy LimitsHow much coverage does a company need?

Two common ways for a company to identify a

prudent limit for its D&O insurance policy are to:

• Benchmark against similar companies; and/or

• Work through common private company

litigation scenarios and then contact outside

counsel to understand the costs associated

with them.

FIGURe 2 Menu Driven Approach


• Carriers provide a singlepolicy with options to addmultiple coverage lines.

• Creates a customizedcomprehensive coverageprogram under one policywith one carrier.

Fiduciary Crime

ManagementLiabilityProgram

Kidnap &Ransom

Directors &O�cers

Employment Practices

• Buyers have the option tocombine limits for premiumsavings or purchase separatelimits for each coverage.


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where a company learns if the broker wants to

work on commission or fee. Finally, a company

can find out if its prospective broker is planning

to charge separately for certain services, for

example, claims handling.

International D&O ConsiderationsIf a company has foreign subsidiaries, it will

want to consider how to optimize its global

D&O insurance program. The issue is that while

your D&O insurance policy probably says that

it provides coverage on a worldwide basis,

whether or not insurance can legally respond in

a local jurisdiction depends on the laws of that

jurisdiction.

In many countries, the stakes may be quite low

because advancing legal fees from the local

subsidiary to an individual director or officer is

easy and straightforward. Where this is not the

case, however, there is a lot more pressure to

have local insurance that complies with all local

regulations.

Depending on a company’s situation, there

are options. Some companies will rely on the

worldwide coverage provided by a master

program and call it a day. Others will decide to

take advantage of certain features that some

European-based D&O policies can provide when

it comes to international coverage.

Many companies will decide to purchase a

few local policies in some of the countries

where the company does business. Some

conservative companies will decide to purchase

D&O insurance in every country where they do

business. A few companies may even build a

tower of insurance for the “rest of the world” that

is separate from the insurance program they use

for their U.S.-based exposure.

In all cases, decisions about international D&O

insurance coverage are rarely static. Part of the

risk management process is to routinely review

the international program with an eye on the

changing business, political, and regulatory

environment.

Choosing a BrokerBecause D&O insurance is a highly customized

financial product, partnering with the right

insurance broker is critical. Here are five key

questions you might ask when looking for an

expert partner.

What can you tell me about your firm and its

culture? This question allows interviewees to give

an overview of their brokerage firm, including

their culture. Listen for things like team cohesion

and stability. This matters because in difficult

situations companies need brokerage teams to

row hard in the same direction on their behalf.

In your view, what are the key exposures my

company faces? This question is a chance to

get free advice from the experts as well as

gain insight into how the brokerage teams are

thinking about a company’s risk. In the best case,

the answer to this question will also tell if you like

the broker’s style of communication.

What do I need to know about the insurance

policies you would recommend and your process

for placing them? An insurance program needs

to be customized for a company’s specific risk

profile. This question will give good brokers the

chance to identify critical insurance policies and

share their process for placing them.

What additional services do you provide?

This question is about client resources. Some

brokers have invested more than others in client

resources such as access to databases, secure

online platforms, claims advocacy, and other

client services. Some of these services will be

more useful to you than others. In general, most

sophisticated brokerages provide more support

than just placing insurance.

What will all of this cost? Cost is important, and

a good broker will break down the costs in an

understandable way. Remember that the cost of

insurance has two elements: the premiums paid

to insurance carriers and the amount paid to the

broker. In this part of the interview, look for how

the broker thinks about premiums and how the

broker manages premiums over time. This is also


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4. Invest in Insurance for Operational RisksCompanies with unique operational exposures,

such as those that use hazardous chemicals

or companies in the life sciences sector, will

want tailored insurance for these exposures.

Most businesses will also accumulate some

quantity of sensitive information they have

an obligation to protect, even if only on the

company’s own employees. Cyber liability

insurance has come onto the scene to address

risks associated with the financial impact of a

data breach.

eXIT STAGe: RISK MANAGeMeNT STRATeGIeS FOR PRIVATe COMPANIeSAt some point, your growing private company

might be interested in a liquidity event, be it a

merger and acquisition (M&A) or IPO. Insurance

can help you optimize these outcomes.

THE M&A ROUTEReps and warranties insurance: A merger or

acquisition is a common exit for many fast-

growing private companies. During M&A,

representations and warranties insurance can be

a powerful bargaining chip for both buyers and

sellers. This insurance protects against breaches

of the representations and warranties made in

a purchase and sale agreement. This insurance

is typically used to reduce the total size of the

escrow in the deal.

Buyers in the M&A transaction are the ones

who most frequently purchase this insurance

(because buyers can insure against a seller’s

fraud), but it is available to the seller as well.

If a buyer agrees to purchase a company based

on the reps and warranties given and those

reps and warranties turn out to be false, the

buyer has the right to submit this claim to the

insurance carrier. Similarly, should the seller

purchase the insurance and the buyer file a

dispute, the seller can expect the insurance to

cover the claim.

OTHER INSURANCE PRODUCTS TO MANAGE RISKD&O insurance is not, of course, the only

insurance that growing companies need to buy.

Consider the following guidelines when putting

together your company’s entire insurance risk

management program:

1. Invest in Insurance When it’s the LawCertain insurance coverages such as workers’

compensation or auto liability for owned

vehicles are statutorily required in nearly every

state. Other insurance requirements will vary

by industry, for example, clinical trial insurance

for life science companies. Companies will want

to work with trusted advisors such as their

attorney and insurance broker to understand

the insurance requirements in each state or

country where a company does business or has

an office.

2. Invest in Insurance to Fulfill Contractual RequirementsSigning a lease, entering into an agreement

with a prospective customer, and signing up

with a preferred employer organization are all

examples of contracts that require a company to

maintain basic commercial insurance. Along with

legal review, have an insurance broker review

the details of the insurance and indemnification

provisions in all your contracts.

3. Invest in Insurance to Transfer Catastrophic RiskA catastrophic, multimillion-dollar claim can

quickly strangle a growing private company,

for example, an auto accident involving an

employee on work assignment with major

injuries to third parties or a class action lawsuit

related to a defective consumer product. For

these scenarios, products such as a general

liability policy and auto insurance are key. It

usually makes sense to supplement these with

an umbrella policy that provides an additional

layer of protection.


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of the company know of nothing that’s likely to

give rise to a claim (a “warranty statement”).

When contemplating an IPO, consider the five

key steps to building a D&O insurance program

that run parallel to the IPO milestones that a

company must achieve (Figure 3):

• Prepare

• Launch

• Broker

• Implement

• Support

Let’s look at those five steps in closer detail.

The first step is to prepare, which includes

developing a risk-management strategy. This

process takes place while the company is

drafting its S-1. Some of the key questions that

need to be answered in this stage are:

• What is the timing of the IPO and is the

company on a dual track?

• What is the size of the IPO and will there be

selling shareholders?

• What is the company’s philosophy on risk

transfer and buying D&O insurance limits?

• Which insurers best fit the company’s needs?

• Does the company face any unusual risks?

• Who are the key executives and who will be

involved in the insurance process?

• How involved does the board of directors want

to be in the insurance decisions?

In addition to its D&O insurance, a pre-IPO

company will want to upgrade all of its other

lines of insurance as well.

The next stage in the D&O insurance process

ahead of the IPO is launch. This process

typically takes place after a company files its

first S-1 registration statement with the SEC.

During this time, companies want to make sure

their insurance broker is modeling policy limits

based on their unique needs and negotiating

with the insurance markets on the company’s

behalf.

D&O insurance tail policy: When a company is

acquired, its existing D&O policy will terminate

at the end of the policy year—not ideal if you are

worried about claims that may arise against your

directors and officers in the future. A tail policy,

also known as a run-off policy, is the solution.

Because D&O insurance is a claims-made type of

policy, the D&O insurance policy that responds

to a claim is the policy that is in place at the time

the claim is made. So, for example, if in 2016 a set

of actions took place that is later challenged in

2017, it’s the 2017 policy that would respond.

This is where a D&O tail policy is crucial. After

companies sell themselves, they stop renewing

their D&O insurance. A tail policy covers

what would otherwise be a gap in coverage

for directors and officers after the sale of a

company.

The gap exists because the D&O policy of the

acquiring company will typically not respond

on behalf of the selling company’s directors and

officers for claims that arise post-closing that

relate to pre-closing activities.

It is completely standard for a buyer to allow

a seller to purchase a six-year tail policy. The

policy should be placed and serviced by the

seller’s broker. This arrangement gives the seller

confidence that, even when the company is

gone, someone loyal to the seller’s directors

and officers will be in charge of the insurance

program that protects them.

THE IPO ROUTEAn IPO is an exciting time for any private

company. But with it come risks—especially for

directors and officers.

When it comes to D&O insurance and an IPO,

it’s best to ramp up the D&O program during

the renewal cycle the year prior to the IPO. This

allows companies to make a few simple—but

strategic—moves. For example, increasing

limits early on gets the all-important warranty

statement out of the way. Whenever a company

purchases a higher limit of insurance, the

company has to tell the insurer selling the new

layer of insurance that the directors and officers


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insurance broker to bind the D&O insurance

program.

Finally, expect ongoing support from your

insurance broker. Keeping directors and officers

up to date with training and advisory services

helps to mitigate risk all year long. Of course,

should the need arise, companies will also

want the benefit of robust claims handling and

advocacy as well.

When done well, insurance can be extraordinarily

useful to a growing company, serving to support

and protect a company’s growth over time.

Sometimes insurance can seem both opaque

and expensive. However, when you work with

an experienced and technically skilled insurance

broker, insurance can be straightforward, fairly

predictable, and very helpful.

Next comes the brokering phase. This is where

all the negotiation happens around insurance

coverage, pricing, and higher limits warranties.

The proposed D&O insurance program will be

presented to and discussed with the board of

directors, who will no doubt want to ask your

broker questions about the program. After all,

like the officers of the company, directors face

the possibility of personal liability should the

company fail to perform post-IPO.

The final stage is implementation. This is where

the program is finalized, the warranties are

executed, and subjectivities (carrier-imposed

conditions) are addressed. When the Securities

and Exchange Commission declares a company’s

registration statement effective and a company

prices its IPO, it’s time to contact the company’s

FIGURe 3 D&O Insurance Process for an IPO

• Develop strategy• Implement carrier NDA

• Evaluate-Private company

insurance-International-Cyber-Other insurance

lines

Confidential S-1 (90 Days) Governance Document

S-1A (45 Days)Public S-1 (40

Days)

PricingFirst day of trade

Road Show (20 days)

D&O Insurance Process

IPO Milestones

• Refine limits analysis

• Negotiate with markets

• Preliminary board presentation

• Negotiate coverage & pricing

• Negotiate warranty statements

• Present insurance program

• Finalize program• Execute

warranties• Address

subjectivities• Coordinate

coverage transition

• Bind IPO coverage

• Counseling• Training/ education• Market update• Claims support

Presentation to Bankers (75 days)SEC comments (60 days)

Prepare> Launch> Broker> Implement> Support>



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Woodruff-Sawyer & Co.50 California Street, 12th Floor

San Francisco, California 94111

Tel: +1 415 391 2141

Web: www.wsandco.com

PRIYA CHERIAN HUSKINSPartner and Senior Vice President

email: [email protected]

Priya Cherian Huskins is a partner at Woodruff-

Sawyer & Co., a full-service insurance

brokerage. She is a recognized expert in D&O

liability risk and its mitigation. In addition

to consulting on D&O insurance matters,

she counsels clients on ways to reduce

their exposure to shareholder lawsuits and

regulatory investigations. Priya is a frequent

speaker on corporate governance and risk

mitigation issues. She is regular lecturer at

director education events such as Stanford’s

Annual Directors’ College. She’s also the author

of the popular D&O Notebook blog.

Priya serves on the board of directors of an S&P

500 public company, a large private company, a

FinTech startup, and a nonprofit. She also serves

on the advisory board of the Stanford Rock

Center for Corporate Governance. Priya began

her career as a corporate and securities attorney

at Wilson Sonsini Goodrich & Rosati (WSGR), one

of Silicon Valley’s leading law firms.

WADE PEDERSONPartner and Senior Vice President

email: [email protected]

Wade Pederson is a partner at Woodruff-Sawyer

& Co., a full-service insurance brokerage. A

member of Woodruff-Sawyer’s P&C Technology

and Corporate & Executive Protection practices,

Wade specializes in property and casualty and

management liability exposures. Wade plays

a key role in managing client relationships

while working directly with insurance markets

to negotiate and place insurance programs.

The breadth of Wade’s practice allows him

to provide clients with a holistic approach to

insurance coverage. Over Wade’s career he has

worked with companies of all sizes, ranging

from startups to multinational firms, giving him

expertise with companies in all stages of growth

and risk complexities. Wade also works with

a variety of industries, with a particular focus

on the technology, biotechnology, and clean

technology sectors. Clients on the cutting edge

of technological innovation benefit from Wade’s

deep expertise when it comes to assessing and

effectively mitigating business risk through

insurance.

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